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Bank of Canada Eyes Retail Sector

Across Canada, retailers have been vying for attention, discounting goods and offering deals as they jockey for position in an increasingly crowded field.

The Bank of Canada has noticed. The increased retail competition, sparked in part by U.S. discount giant Target Corp.’s rapid-fire 124-store expansion across Canada, has had an impact on Canada’s consumer price index, suppressing inflation to levels well below the central bank’s 2% target.

And that’s creating a conundrum for policymakers. Canada is faced with record high household debt loads, which seem to beg for higher interest rates, but also sluggish inflation rates and a slowing economy, which beg for lower ones. The central bank, meanwhile, has a single mandate: a 2% inflation target.

As it watches inflation, the Bank of Canada is eyeing the country’s increasingly competitive retail sector. In recent years, a steady parade of foreign retailers–from upscale brands such as J.Crew to discount ones such as Target and Tanger Factory Outlet Centers Inc.—have come to Canada in search of growth markets.

They’ve been lured by the relative health of the Canadian consumer. This advanced economy emerged from the global recession more swiftly than most and more quickly recouped the jobs it lost in the depth of the downturn. Canadians were spending, when others weren’t.

Now, core inflation in Canada is being weighed down by “significant excess supply and by the effects of heightened competition in the retail sector, which look to be more persistent than anticipated,” the Bank of Canada said Wednesday in a 370-word statement that accompanied its decision to hold its key interest rate steady at 1%.

The core inflation rate, which strips out some volatile food and energy costs, grew 1.2% year-on-year in October and has lingered below the 2% threshold for more than a year.

The downdraft in global inflation has “a unique Canadian twist to it” where retail margins are concerned, Derek Holt, vice-president of economics at Bank of Nova Scotia, said in a research note Wednesday. He said “relatively fat Canadian retail margins” have been squeezed both by foreign competition and by a mature Canadian consumer cycle that requires smaller margins to extend spending.

Canadians, now saddled with high debt, are willing to spend, but they’re looking for deals.

About Canada Real Time

Canada Real Time provides insight and analysis into what’s making news in Canada, a country punching above its weight on the world stage thanks to its vast resources and strong banking sector. Drawing on the expertise of The Wall Street Journal and Dow Jones Newswires, we take a look at developments in fields ranging from business to politics to culture. You can contact the editors at canadaeditors@dowjones.com